Investors bemoan Blumenthal's role in predatory-lending settlement

Attorney General Richard Blumenthal, Democratic candidate for U.S. Senate.

Attorney General Richard Blumenthal, Democratic candidate for U.S. Senate.

Photo: Contributed Photo, Greenwich Time

Photo: Contributed Photo, Greenwich Time

Image
1of/4

Caption

Close

Image 1 of 4

Attorney General Richard Blumenthal, Democratic candidate for U.S. Senate.

Attorney General Richard Blumenthal, Democratic candidate for U.S. Senate.

Photo: Contributed Photo, Greenwich Time

Investors bemoan Blumenthal's role in predatory-lending settlement

1 / 4

Back to Gallery

A group of attorneys general highlighted by Senate hopeful Richard Blumenthal is being blamed by a host of investors for devaluing billions of dollars of mortgage-backed securities as part of what the investors decried as an ill-conceived settlement with loan giant Countrywide.

The product of a class-action lawsuit brought by Blumenthal and his colleagues against Countrywide over predatory-lending practices in 2008, the $8.6 billion settlement was hailed by the Democrat as a victory for distressed borrowers to save their homes by allowing them to restructure their mortgages.

But the settlement's detractors, who include Republican Senate candidate Linda McMahon, say that Bluemthal and the other architects of the deal with Countrywide parent Bank of America failed to grasp the fundamental concept that investors owned the lion's share of those mortgage-backed securities.

Instead of paying for the cost of the settlement, Bank of America was allowed to restructure those mortgages in what is known as a write-down, shifting its losses onto institutional investors such as pension and hedge funds, critics claim.

"Bank of America, to be polite, bamboozled these AGs," said William Frey, president of Greenwich Financial Services LLC, a securities broker-dealer in Blumenthal's hometown. "They went up behind them and dropped their drawers."

Related Stories

Often characterized in the media as a hedge fund, Frey's company filed a lawsuit against Countrywide in December 2008 that was recently dismissed by a New York State Supreme Court justice because the firm had failed to get 25 percent of its investors to sign onto the legal action.

Frey maintains that the settlement violated a contract provision requiring Bank of America to buy back the mortgages it restructured owned by him and his clients, who he would not identify but said includes entities such as pension funds.

"I don't have an ax to grind with the guy. He's a nice guy," Frey said of Blumenthal.

Blumenthal, the target of a scathing new television ad from McMahon's campaign scrutinizing his role in the settlement, based partly on a story in The Nation, defended his actions.

"Linda McMahon's attacks are false and outrageous," Blumenthal said in a statement Friday. "I sued Countrywide, held them accountable, and helped thousands of homeowners stay in their homes. The settlement helped both homeowners and investors, then and now."

Blumenthal's campaign pointed out that the settlement forced Bank of America to establish a $150 million fund to help repay borrowers whose homes had been foreclosed upon, $1.3 million of which went to Connecticut.

A separate fund of $70 million was also created to reimburse homeowners for relocation expenses, with another $1.3 million coming back to the state, according to the campaign, which said a key stipulation of the settlement prevented the bank from charging late fees and pre-payment fees on restructured loans.

McMahon stood by her latest line of attack in what is easily the most expensive political race in Connecticut history, one in which the former World Wrestling Entertainment chief executive has tried to portray the 20-year attorney general as a grandstanding bureaucrat who is bad for business.

"I am just absolutely baffled at how an attorney general and a seasoned lawyer could structure a deal of this impact and not hold Countrywide accountable for these loans," McMahon said in a telephone interview Friday. "Whether it was incompetence or arrogance, you have to look at one or the other in the structuring of this settlement."

Chris Katopis, executive director of the Association of Mortgage Investors, a Washington-based trade organization that represents 20 financial services institutions holding $300 billion in mortgage-backed securities, but not all with Countrywide, said the settlement is a source of widespread frustration.

"The feedback has been the settlement has been very problematic and, in many cases, detrimental to these institutions," Katopis said. "The settlement basically settled the case surrounding bank predatory lending with pensioners' money."

Not everyone harbored sympathy for those investors whose mortgage-back securities depreciated in value as a result of the settlement, however.

Peter Schiff, an economist and money manager from Weston who lost a three-way Republican primary to McMahon in August, said mortgage-backed securities carry an inherent risk and include subprime loans.

"A lot of people were foolishly buying these mortgage products," said Schiff, president of Euro Pacific Capital, a Westport-based brokerage firm. "My guess is that they were just as greedy and foolish as everyone else. They figured that real estate could never go down."

Some of Blumenthal's campaign advisers made a similar argument, saying that those who took a gamble on securitized loans were looking to the courts to give them a 100 percent return on what were questionable investments to start.

Talcott Franklin, a Dallas-based lawyer whose firm represents investors holding more than a third of the outstanding residential mortgage-backed securities on the market, challenged that premise.

"The ultimate beneficiaries of these mortgage-backed securities are ordinary people counting on pensions, life insurance policies and charitable contributions, as well as government entities expecting a fixed rate of return for public projects," Franklin said. "Those beneficiaries have no idea that their futures are invested in residential mortgage-backed securities, and they need to be protected."

Bank of America, which acquired Countrywide in June 2008, did not respond to a message seeking comment about the settlement.

Isaac Gradman, a San Francisco lawyer specializing in subprime mortgage cases and author of the blog "The Subprime Shakeout," said the attorneys general involved in the case dropped the ball.

"Basically, they allowed Countrywide to settle this lawsuit to modify 400,000 loans, with an approximate value of $8.4 billion, that Countrywide didn't own anymore," Gradman said. "Absolutely it was a bad deal for the institutional investors and for the taxpayers."

McMahon's campaign says that the real losers as a result of the flawed settlement are the taxpayers, who are being forced to increase pension fund contributions to offset investment losses.

"These are teachers and other public servants that are going to be footing this bill, and that's absolutely wrong," McMahon said.

Tomasz Piskorski, an assistant professor of finance and economics at Columbia Business School, said the settlement had other unintended consequences.

"We have some evidence that the settlement induced Countrywide borrowers to miss payments so that they would qualify for the modification," Piskorski said.

Frey, who is organizing a consortium of investors for a possible appeal of the lawsuit filed by Greenwich Financial Services, said he wishes Blumenthal and the other attorneys general would have consulted with investors before negotiating the settlement.

"The guy who negotiated this for Bank of America is a genius," Frey said. "Being a genius doesn't mean it's right."

-- Staff writer Neil Vigdor can be reached at neil.vigdor@scni.com or at 203-625-4436.